What Is A Cryptocurrency?
What Is A Cryptocurrency?
A cryptocurrency is a digital asset or a form of virtual money that is transferable and allows two or more parties to transact over the internet. Cryptocurrency is known as electronic/virtual money is just like physical (paper) money although it has the additional properties that allow it to be transferred instantly between two or more parties over a computer network.
The value of the cryptocurrency is equated to a dollar amount such that whoever holds the cryptocurrency can be able to redeem it for its value in physical money or use it to buy goods or services online. The value of cryptocurrencies is driven and determined by supply and demand on the crypto exchange as well as the rate at which the cryptocurrency can be exchanged for another currency.
Introduction of cryptocurrency
Although cryptocurrencies have recently gained popularity over the past few years, they were actually introduced close to ten years ago, albeit in a ‘raw’ format that had a long way to go before being ‘acceptable’ worldwide. Satoshi Nakamoto (a reported pseudonym) is considered the ‘father of cryptocurrencies’ as it is believed that he is the first person to have successfully created a fully functional cryptocurrency by the name of Bitcoin.
Initially, the idea was to have the cryptocurrency based on the model whereby it was centralized and transferable just as someone would share a file in peer-to-peer electronic money network. However, this ideology would later be slightly amended such that cryptocurrency would be a decentralized, secure representation of value that is devoid of government or any other external manipulation.
Over the years, a huge number of cryptocurrencies have been introduced into the market, adopting a similar functionality with what Bitcoin provides. These include Litecoin, Etherium, Zcash, Ripple, and Monero.
How cryptocurrencies work
If we bring it down to the basics, any currency is fundamentally storage of value that can be transferred between entities and used to purchase goods or pay for services. Cryptocurrency was set up in such a way that it can perform these functions in a secure, easily transferable way with minimal fees while at the same time be accessible to anyone around the world as long as you have a working internet connection and an electronic money wallet. Each user has a unique public key (which is likened to an account number) and private key which is like a PIN.
There are two main ways to acquiring cryptocurrencies. For example in the case of Bitcoin, you can either exchange your national currency for Bitcoin or carry out Bitcoin ‘mining’ which is done by solving complex mathematical algorithms to discover a new ‘block’ after which is added to the blockchain and you as the miner is rewarded with a number of bitcoins.
Advantages of cryptocurrencies
Cryptocurrencies have made it possible for people to transfer funds globally without the long delays and exorbitant fees that have become synonymous with electronic bank transfers. The elimination of the ‘third party’ intermediaries made transactions much smoother than they would be when dealing with government currencies. Transactions are also pseudonymous, permission-less and tax-free. Meaning that all you need for a successful transaction are two willing parties and the cryptocurrency.
Disadvantages and risks of cryptocurrencies
Owing to the fact that transactions carried out using cryptocurrencies are anonymous, this means that people can carry out illegal activities such as money laundering and tax evasion without being identified. As a matter of fact bitcoins and other cryptocurrencies have been identified as the black diamonds of the digital era.
Case in point in May 2017, hackers held people’s data at ransom (the WannaCry attack) and demanded payment through bitcoins. Earlier in 2011, an online drug, contraband and other counterfeit material market called The Silk Road came into existence through a man called Ross William Ulbricht. On this website, merchants and buyers could sell and buy almost all types of drugs anonymously using Bitcoin.